How The Stock Exchange Works - For Dummies

What is the stock market and how does it work? 

The stock market is nothing other than a huge global network which organizes the market on which huge sums of money are moved every day. In total, more than 60,000 billion euros per year are exchanged .What exceeds the value of all goods and services produced worldwide .However, apples or toothbrushes are not traded in this market. But mainly titles Securities give rights to assets, often in the form of shares .

Photo by Austin Distel on Unsplash

But why do we trade stocks? 

First, the value of a stock is tied to the business behind it. If you think about the value of a business in terms of pizza. The larger the size of the pizza, the larger each piece. If for example Facebook manages to increase its profits with a new economic model. So the size of the company's pizza will also increase, as will the value of its shares .Which is of course very good for shareholders. An action that was worth 38 euros could now be worth 50 euros Selling it would yield a gain of 12 euros per share

What does Facebook gain from it?

 The company can raise funds by selling shares to invest or expand its business Facebook, for example, earned $ 16 billion by going public .Unfortunately, the exchange of shares is often a game of chance .No one can say which business will perform well and which business will fail .If a company has a good reputation, investors will support it. A company with a bad reputation or poor performance will find it difficult to sell its shares. Unlike a traditional market, where you can touch the items and bring them home only virtual goods are available on the stock market .

They appear in the form of quotes and tables on screens .These quotes can go up or down in seconds .Shareholders must therefore act quickly so as not to miss an opportunity. Even a simple rumor can quickly drop the demand for an action, regardless of the real value of the business. Of course, the opposite is also possible. If a large number of people buy stocks (because they see great potential behind a business idea, for example), Their value will therefore increase

In particular, young companies can benefit from it. Even if their sales are poor, they can generate money by selling their shares. Ideally, this will allow their ideas to emerge .In the worst case, this will result in a speculative bubble with nothing more than hot air. And in the case of bubbles, at some point or other they will burst .The value of the 30 largest companies in Germany is summarized by the DAX index. The DAX translates the performance of these companies and thus of the German economy at a given time. The stock exchanges of other countries also have their indices. And all of these markets together form a globally connected market

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